11th Mar 2008 07:01
NETeller PLC11 March 2008 NETELLER Plc Consolidated Balance Sheetas at 31 December 2007 31 DECEMBER 31 DECEMBER 2007 2006 $ $ASSETSCurrent Cash and cash equivalents 80,750,283 216,165,164 Restricted cash (Note 4) 10,817,605 11,995,217 Qualifying Liquid Assets held for European consumers (Note 5) 61,885,103 63,425,683 Receivable from customers (Note 6) 475,000 2,625,000 Trade and other receivables 735,399 866,109 Prepaid expenses and deposits 2,708,248 3,582,140 157,371,638 298,659,313Non-current assets Mortgage receivable (Note 7) 764,550 - Property, plant & equipment (Note 8) 44,305,153 25,540,456 Intangible assets (Note 9) 17,885,728 23,880,558 Goodwill (Note 10) 11,802,162 11,646,188 Investment in associate (Note 11) 4,115,626 - Interest in joint venture (Note 12) 50,258 - 236,295,115 359,726,515 LIABILITIESCurrent Trade and other payables (Note 13) 22,901,237 18,199,379 Payable to European consumers (Note 5) 57,032,664 54,058,047 Forfeiture payable (Note 14) 38,250,415 - Taxes payable (Note 20) 2,326,889 4,901,296 Conditional consideration payable (Note 15) - 2,596,749 120,511,205 79,755,471 SHAREHOLDERS' EQUITY Share capital (Note 16) 39,725 39,725 Share premium 50,554,492 50,554,492 Capital redemption reserve 147 147 Equity reserve on share option issuance 3,219,506 9,683,697 Translation reserve (Note 17) 9,412,813 1,349,198 Retained earnings 52,557,227 218,343,785 115,783,910 279,971,044 236,295,115 359,726,515 NETELLER Plc Consolidated Income Statementfor the Year Ended 31 December 2007 YEAR ENDED 31 YEAR ENDED DECEMBER 2007 31 DECEMBER 2006 $ $ Revenue Transaction fees 69,930,071 238,851,260 Investment income 14,072,368 18,498,567 84,002,439 257,349,827 Cost of sales Customer support 12,427,967 18,296,855 Website maintenance 7,172,417 6,160,917 Deposit and withdrawal fees 10,143,891 18,867,784 Bad debts 7,534,553 32,876,219Gross profit 46,723,611 181,148,052 Operating expenses/(income) General and administrative 33,992,095 39,990,577 Share option expense (Note 23) 13,523,346 6,106,827 Management bonus 2,643,030 4,249,710 Foreign exchange loss/(gain) 516,466 (780,055) Depreciation and amortisation (Note 18) 8,582,983 11,346,062 Investment loss (Note 11) 243,536 -(Loss)/profit before other items (12,777,845) 120,234,931 Other items Impairment loss (Note 9 & 10) - 11,693,316 Restructuring costs (Note 19) 36,981,517 1,160,177 Forfeiture of profits related to US withdrawal (Note 14) 136,000,000 -(Loss)/profit before tax (185,759,362) 107,381,438 Income tax expense (Note 20) 14,734 4,910,025 Net (loss)/profit for the year (185,774,096) 102,471,413 Basic (loss)/ earnings per share (Note 21) $(1.55) $0.85 Diluted (loss)/ earnings per share (Note 21) $(1.55) $0.85 NETELLER Plc Consolidated Statement of Changes in Equityfor the Year Ended 31 December 2007 SHARE SHARE TOTAL EQUITY TRANSLATION CAPITAL CAPITAL CAPITAL RESERVE ON REDEMPTION - - SHARE RESERVE ON FOREGIN RESERVE RETAINED ORDINARY DEFERRED CAPITAL SHARE OPTION OPERATIONS EARNINGS SHARES SHARES SHARE ISSUANCE $ TOTAL $ $ $ $ $ PREMIUM $ $ $Balance as at1 January 2006 21,794 18,000 39,794 48,410,150 3,576,870 (1,497,326) - 124,533,076 175,062,564 Issue of 78 - 78 2,144,342 - - - - 2,144,420ordinary sharesduring the yearRepurchase of (147) - (147) - - - 147 (8,660,704) (8,660,704)ordinary sharesduring theperiodEquity reserve - - - - 6,106,827 - - - 6,106,827on optionissuanceTranslation - - - - - 2,846,524 - - 2,846,524reserve onforeignoperationsNet profit for - - - - - - - 102,471,413 102,471,413the year Balance as at 31December 2006 21,725 18,000 39,725 50,554,492 9,683,697 1,349,198 147 218,343,785 279,971,044Balance as at1 January 2007 21,725 18,000 39,725 50,554,492 9,683,697 1,349,198 147 218,343,785 279,971,044 Equity reserve - - - - 13,523,347 - - - 13,523,347on optionissuanceTranslation - - - - - 8,063,615 - - 8,063,615reserve onforeignoperationsTransfer on - - - - (19,987,538) - - 19,987,538 -expiry Net loss for the - - - - - - - (185,774,096) (185,774,096)year Balance as at 31December 2007 21,725 18,000 39,725 50,554,492 3,219,506 9,412,813 147 52,557,227 115,783,910 NETELLER Plc Consolidated Cash Flow Statementfor the Year Ended 31 December 2007 YEAR ENDED 31 YEAR ENDED 31 December 2007 December 2006 $ $OPERATING ACTIVITIES(Loss)/income before tax (185,759,362) 107,381,438 Adjustments for: Depreciation and amortisation 8,582,983 11,346,062 Unrealised foreign exchange gain (667,866) (2,076,805) Share option expense 13,523,346 6,106,827 Investment loss (Note 11) 243,536 - Impairment loss (Notes 9 & 10) - 11,693,316 Asset write down and disposal (Notes 8 & 9) 13,213,027 -Operating cash flows before movements in working capital (150,864,336) 134,450,838 Decrease in receivable from customers 2,146,319 (668,166) Decrease in trade and other receivables 130,710 (615,151) Decrease in prepaid expenses and deposits 566,229 (2,191,686) Increase in trade and other payables 4,428,565 7,056,663 Forfeiture payable (Note 14) 38,250,415 -Cash (consumed)/generated by operations (105,342,099) 138,032,498 Tax paid (2,589,141) (3,568,512) Net cash (consumed)/generated from operating activities (107,931,240) 134,463,986 INVESTING ACTIVITIES Increase in payable to European consumers 2,974,617 25,166,755 Purchase of property, plant & equipment and intangible assets (30,203,134) (30,365,954) Proceeds from disposal of property, plant & equipment 3,789,672 - Decrease in restricted cash accounts 1,177,612 9,768,197Decrease/(increase) in Qualifying Liquid Assets held for European consumers 1,540,579 (31,830,376) Investment in associate (4,359,162) - Investment in joint venture (50,258) - Net cash used in investing activities (25,130,074) (27,261,378) FINANCING ACTIVITIES Mortgage receivable (764,550) - Conditional consideration (2,482,330) (2,468,834) Proceeds on issuance of shares - 2,144,420 Repurchase of ordinary shares - (8,660,704) Net cash generated from financing activities (3,246,880) (8,985,118) (Decrease)/increase in cash and cash equivalents during the year (136,308,194) 98,217,490Net effect of foreign exchange on cash and cash equivalents 674,450 530,722Translation of foreign operations 218,862 2,846,524 Cash and cash equivalents, beginning of year 216,165,165 114,570,429 Cash and cash equivalents, end of year 80,750,283 216,165,165 NETELLER Plc Notes to Consolidated Financial Statementsfor the Year Ended 31 December 2007 1. GENERAL NETELLER Plc (the "Company") was incorporated as a private company under thelaws of the Isle of Man ("IOM") on 31 October 2003 and was registered as apublic company on 1 April 2004. The principal activities of the Company and theGroup are described in Note 2. The Group includes the Company and its whollyowned subsidiaries as set out under "Principles of consolidation" in note 3below. These financial statements are presented in US dollars ("$") since that is thecurrency in which the majority of the Group's transactions are denominated. At 31 December 2007, the Group had 419 employees (2006: 738 employees). 2. NATURE OF OPERATIONS The Group's principal activities are the provision of innovative paymentsolutions to businesses and individuals in selected e-commerce communities.NETELLER (UK) Limited, a UK subsidiary of the Group, is authorised by the FSA toissue e-money. 3. SIGNIFICANT ACCOUNTING POLICIES The financial statements have been prepared in accordance with applicable IOMlaw and International Financial Reporting Standards ("IFRS"). The followingprincipal accounting policies have been applied: Principles of consolidation The consolidated financial statements incorporate the financial statements ofthe Company and enterprises controlled by the Company (and its subsidiaries) asat year end. Control is achieved where the Company has the power to govern thefinancial and operating policies of an investee enterprise so as to obtainbenefits from its activities. The consolidated financial statements include theaccounts of the Company and its principal wholly owned subsidiaries, NETELLEROperations Limited, NetAdmin Limited, Net ID Limited, NT Services Limited,NETELLER (UK) Limited, NetBanx Limited, Quick Access International Limited,1155259 Alberta Limited, NT Services Building Corporation, NetB Limited,Cardload Europe Limited, and Netpro Limited. All inter-company transactions andbalances between Group enterprises are eliminated on consolidation. In the non-consolidated financial statements of the Company, investments insubsidiaries are stated at cost. Investments in associates An associate is an entity over which the Group has significant influence andthat is neither a subsidiary nor an interest in a joint venture. Significantinfluence is the power to participate in the financial and operating policydecisions of the investee but is not control or joint control over thosepolicies. The results and assets and liabilities of associates are incorporated in thesefinancial statements using the equity method of accounting. Under the equitymethod, investments in associates are carried in the consolidated balance sheetat cost as adjusted for post-acquisition changes in the Group's share of the netassets of the associate, less any impairment in the value of individualinvestments. Losses of an associate in excess of the Group's interest in thatassociate (which includes any long-term interests that, in substance, form partof the Group's net investment in the associate) are recognised only to theextent that the Group has incurred legal or constructive obligations or madepayments on behalf of the associate. Where a Group entity transacts with an associate of the Group, profits andlosses are eliminated to the extent of the Group's interest in the relevantassociate. Interests in joint ventures A joint venture is a contractual arrangement whereby the Group and other partiesundertake an economic activity that is subject to joint control when thestrategic financial and operating policy decisions relating to the activities ofthe joint venture require the unanimous consent of the parties sharing control. Joint venture arrangements that involve the establishment of a separate entityin which each venturer has an interest are referred to as jointly controlledentities. The Group has significant influence on the entity and reports itsinterests in jointly controlled entities using the equity method of accounting.Under the equity method, investments in associates are carried in theconsolidated balance sheet at cost as adjusted for post-acquisition changes inthe Group's share of the net assets of the entity, less any impairment in thevalue of individual investments. Where the Group transacts with its jointly controlled entities, unrealisedprofits and losses are eliminated to the extent of the Group's interest in thejoint venture. Cash and cash equivalents Cash equivalents are defined as short-term, highly liquid investments that arereadily convertible to known amounts of cash and which are subject to aninsignificant risk of changes in value. Intangible assets Intellectual property is recorded at cost and is amortised on a straight-linebasis over its estimated useful life which is assessed to be three years. Website development costs are recorded at cost and are amortised over theirestimated useful life using the declining-balance method at 30%. Intangible assets resulting from acquisitions are amortised straight line over 8to10 years. Property, plant & equipment Land is not depreciated. Property, plant & equipment are recorded at cost andare amortised over their estimated useful lives, using the declining-balancemethod, on the following basis: Communication equipment 20%Furniture and equipment 20%Computer equipment 30% Assets are depreciated over their estimated useful lives, using thestraight-line method, on the following basis: Computer software 2 yearsBuilding& Leasehold Improvements 20 years The gain or loss arising on the disposal or retirement of an asset is determinedas the difference between the sales proceeds and the carrying amount of theasset and is recognised in income. Impairment The carrying amount of the Group's assets, other than deferred tax assets (seeaccounting policy below) are reviewed at each balance sheet date to determinewhether there is any indication of impairment. If any such indication exists,the recoverable amount of the asset is estimated in order to determine theextent of the impairment loss (if any). Where it is not possible to estimatethe recoverable amount of an individual asset, the Group estimates therecoverable amount of the cash-generating unit to which the asset belongs. Goodwill Goodwill arising on consolidation represents the excess of the cost ofacquisition over the Group's interest in the fair value of the identifiableassets and liabilities of subsidiaries at the date of acquisition. Goodwill is recognised as an asset and reviewed for impairment at leastannually. Any impairment is recognised immediately in the income statement andis not subsequently reversed. On disposal of a subsidiary, the attributable amount of goodwill is included inthe determination of the profit or loss on disposal. Receivable from customers Trade and other receivables, including receivables from customers, are stated attheir amortised cost less impairment losses and doubtful accounts. Deferred tax The Group uses the balance sheet liability method of accounting for incometaxes. Temporary differences arising from the difference between the tax basisof an asset or liability and its carrying amount on the balance sheet are usedto calculate deferred tax assets or liabilities. Deferred tax assets orliabilities are calculated using tax rates anticipated to exist in the periodsthat the temporary differences are expected to reverse. Segment information No analysis related to segmented profit and loss information is disclosed, asthe Directors are of the opinion that all of the Group's activities arise fromonline transactions where the production is singular and all economic andgeographic environments are subject to similar risks and returns. Revenue recognition The Group is involved in transaction processing services. Revenues fromtransaction processing services are recognised at the time services arerendered. Consumer revenue is recognised either as a fee calculated as apercentage of funds processed or as a charge per transaction, pursuant to therespective consumer agreements. Merchant revenue is recognised as a feecalculated as a percentage of funds processed on behalf of merchants. Interest income is accrued on a monthly basis, by reference to the principaloutstanding and at the effective interest rate applicable. Leases All leases are classified as operating leases as the terms of the lease do nottransfer substantially all the risks and rewards of ownership to the lessee. Foreign exchange The individual financial statements of each Group entity are presented in thecurrency of the primary economic environment in which the entity operates (itsfunctional currency). For the purpose of the consolidated financial statements,the results and financial position of each entity are expressed in United Statesdollars, which is the functional currency of the Company, and the presentationcurrency for the consolidated financial statements. In preparing the financial statements of the individual entities, transactionsin currencies other than the entity's functional currency (foreign currencies)are recorded at the rates of exchange prevailing on the dates of thetransactions. At each balance sheet date, monetary items denominated in foreigncurrencies are retranslated at the rates prevailing on the balance sheet date.Non-monetary items carried at fair value that are denominated in foreigncurrencies are retranslated at the rates prevailing on the date when the fairvalue was determined. Non-monetary items that are measured in terms ofhistorical cost in a foreign currency are not retranslated. Exchange differences arising on the settlement of monetary items, and on theretranslation of monetary items, are included in profit or loss for the period.Exchange differences arising on the retranslation of non-monetary items carriedat fair value are included in profit or loss for the period except fordifferences arising on the retranslation of non-monetary items in respect ofwhich gains and losses are recognised directly in equity. For such non-monetaryitems, any exchange component of that gain or loss is also recognised directlyin equity. For the purpose of presenting consolidated financial statements, the assets andliabilities of the Group's foreign operations (including comparatives) areexpressed in United States dollars using exchange rates prevailing on thebalance sheet date. Income and expense items (including comparatives) aretranslated at the average exchange rates for the period, unless exchange ratesfluctuated significantly during that period, in which case the exchange rates atthe dates of the transactions are used. Exchange differences arising, if any,are classified as equity and transferred to the Group's translation reserve.Such translation differences are recognised in profit or loss in the period inwhich the foreign operation is disposed of. Goodwill and fair value adjustments arising on the acquisition of foreignoperations are treated as assets and liabilities of the foreign operation andtranslated at the closing rate. Related party transactions Monetary related party transactions in the normal course of operations arerecorded at fair value, and transactions between related parties, not in thenormal course of operations, are recorded at the carrying value as recorded bythe transferor. Use of estimates The preparation of the Group's financial statements requires management to makeestimates and assumptions that affect the reported amounts of assets,liabilities and contingencies at the date of the Group's financial statements,and revenue and expenses during the reporting period. Actual results coulddiffer from those estimated. Significant estimates in the Group's financialstatements include the amount recorded for provision for doubtful accounts,commitments and contingencies. By their nature, these estimates and assumptionsare subject to measurement uncertainty and the effect on the Group's financialstatements of changes in estimates in future periods could be significant. Foreign exchange contracts The Group uses foreign exchange contracts to reduce its exposure to adversefluctuations in foreign exchange rates. These financial instruments arepresented in the accompanying consolidated financial statements at fair value.Fair values are based on market quotes, current foreign exchange rates ormanagement estimates, as appropriate, and gains and losses on the foreignexchange contracts are reflected in the consolidated income statement. Theincrease or decrease in the fair value of the contracts has been taken toincome. Research and development Research expenditure is written off to the income statement in the period inwhich it is incurred. Development expenditure is written off in the same way unless management issatisfied as to the technical, commercial and financial viability of theindividual projects. In this situation, the expenditure is capitalised, at costless a provision for any impairment in value, and is amortised on thecommencement of use over the period in which benefits are expected to bereceived by the Group. Share-based payments The Company issues share options to certain employees, including Directors.Share options are measured at fair value at the date of grant. The fair valuedetermined at the grant date of the share option is expensed on a straight-linebasis over the vesting period, based on the Company's estimate of shares thatwill eventually vest. Fair value is measured using the Trinomial Latticepricing model. When necessary, the expected life used in the model is adjusted,based on management's best estimates, for the effects of non-transferability,exercise restrictions and behavioural considerations. Offsetting Financial assets and liabilities are set off and the net amount presented in thebalance sheet when, and only when, the Group has a legal enforceable right toset off the amounts and intends either to settle on a net basis or to realisethe asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted by theaccounting standards, or for gains and losses arising from a group of similartransactions such as in the Group's trading activity. Defined contribution pension plans Obligations for contributions to defined contribution pension plans arerecognised as an expense in the income statement as incurred. 4. RESTRICTED CASH For merchants and non-European consumers, the Group maintains bank accountswhich are segregated from operating funds and which contain funds held on behalfof customers, representing pooled customer funds. Balances in the segregatedaccounts are maintained at a sufficient level to fully offset amounts owing tothe Group's merchants and consumers. A legal right of offset exists between thebalances owing to the merchants and consumers and the cash balances segregatedin the trust accounts. As such, only the net balance of surplus cash isdisclosed on the balance sheet as Restricted Cash. At 31 December 2007, the Group had the following balances: TRUST BALANCE RESTRICTED ACCOUNT OWING CASH FUNDS $ $ $ Non-European Consumers 41,755,492 34,350,329 7,405,163 Merchants 48,957,085 45,544,643 3,412,442 90,712,577 79,894,972 10,817,605 At 31 December 2006, the Group had the following balances: TRUST BALANCE RESTRICTED CASH ACCOUNT OWING FUNDS $ $ $ Non-European Consumers 133,380,557 130,687,550 2,693,007 Merchants 130,946,747 121,644,537 9,302,210 264,327,304 252,332,087 11,995,217 5. QUALIFYING LIQUID ASSETS HELD FOR EUROPEAN CONSUMERS In compliance with the Financial Services Authority rules and regulations, aGroup entity holds Qualifying Liquid Assets at least equal to the amounts owingto European consumers. These amounts are maintained in accounts which aresegregated from operating funds. The Group had the following balances: AS AT 31 AS AT 31 DECEMBER 2007 DECEMBER 2006 $ $ Qualifying Liquid Assets held for European consumers 61,885,103 63,425,683Payable to European consumers (57,032,664) (54,058,047) 4,852,439 9,367,636 6. RECEIVABLE FROM CUSTOMERS The Group had the following balances: AS AT 31 AS AT 31 DECEMBER 2007 DECEMBER 2006 $ $ Receivable from customers 16,296,289 16,454,571 Provision for doubtful accounts (15,821,289) (13,829,571) 475,000 2,625,000 Receivable from customers consists of balances that are due from customers andare in the process of collection. The net receivable from customers representsthe amounts which are expected to be collected through the normal course ofbusiness. 7. MORTGAGE RECEIVABLE The Group holds a mortgage as a portion of the proceeds on the sale of theGroup's 41st Avenue property in Calgary, Canada. Interest at a rate of 6% ischarged with the principal payable at the end of 3 years. The payment scheduleis as follows: Interest Principal Principal CAD $ CAD $ USD $2008 45,000 - -2009 45,000 - -2010 33,750 750,000 764,550 123,750 750,000 764,550 8. PROPERTY, PLANT & EQUIPMENT The Group had the following balances: COMMUNICATION FURNITURE COMPUTER COMPUTER BUILDING AND LAND TOTAL AND IMPROVEMENTS EQUIPMENT EQUIPMENT EQUIPMENT SOFTWARE $ $ $ $ $ $ $CostAs at 31 December 803,555 1,092,200 2,890,596 2,978,797 3,009,651 936,396 11,711,1952005Additions 2,296,206 1,219,905 1,300,441 5,278,866 9,838,565 - 19,933,983As at 31 December 3,099,761 2,312,105 4,191,037 8,257,663 12,848,216 936,396 31,645,1782006Additions 530,598 351,883 87,201 3,380,556 14,113,828 5,622,351 24,086,417Write down - - (747,848) (4,476,328) - - (5,224,176)Disposals - - (135,685) (36,776) (3,191,530) (1,169,777) (4,533,768)Re-classification - (510,872) - 118,156 510,872 - 118,156Exchange 542,853 409,048 788,213 710,802 5,298,769 1,237,130 8,986,815differenceAs at 31 December 4,173,212 2,562,164 4,182,918 7,954,073 29,580,155 6,626,100 55,078,6222007 AccumulateddepreciationAs at 31 December 183,741 122,510 758,636 915,085 206,375 - 2,186,3472005Charge for the 386,016 302,818 962,895 1,746,900 519,746 - 3,918,375yearAs at 31 December 569,757 425,328 1,721,531 2,661,985 726,121 - 6,104,7222006Charge for the 685,244 418,995 691,654 1,405,093 1,420,714 - 4,621,700yearWrite down - - - (856,531) - - (856,531)Disposals - - (49,811) (24,211) (474,413) - (548,435)Re-classification - (82,354) - 120,656 82,354 - 120,656Exchange 209,319 104,067 376,761 405,868 235,342 - 1,331,357differenceAs at 31 December 1,464,320 866,036 2,740,135 3,712,860 1,990,118 - 10,773,4692007 Net book valueAs at 31 December 619,814 969,690 2,131,960 2,063,712 2,803,276 936,396 9,524,8482005Net book valueAs at 31 December 2,530,004 1,886,777 2,469,506 5,595,678 12,122,095 936,396 25,540,4562006Net book valueAs at 31 December 2,708,892 1,696,128 1,442,783 4,241,213 27,590,037 6,626,100 44,305,1532007 Computer equipment and computer software write down The Group recorded a write down of $4.4 million (net of accumulateddepreciation) related to computer equipment and computer software assets in theyear ended 31 December 2007. The Group identified the cessation of transactionprocessing in the North American market and the resultant significantrestructuring of the Group's cost base as indication of asset impairment.Excess computer equipment was disposed for nominal proceeds and written down tonil net book value. The carrying amount of computer software was written downto the estimated recoverable amount based on future cash flows expected fromnon-North American markets. Asset disposal The Group sold a property located on 41st Avenue, Calgary, Canada on 4 September2007. Proceeds of approximately CAD $4 million were received with CAD $0.75million payable as a vendor take back mortgage over three years as set out inNote 7 to the Financial Statements. 9. INTANGIBLE ASSETS The Group had the following balances: INTELLECTUAL PROPERTY WEBSITE DEVELOPMENT TOTAL $ $ $CostAs at 31 December 2005 24,138,156 8,696,016 32,834,172Additions 1,323,737 9,108,235 10,431,972Impairment loss (Note 10) (7,405,694) - (7,405,694)As at 31 December 2006 18,056,199 17,804,251 35,860,450Additions 369,151 5,747,567 6,116,718Write down - (11,866,305) (11,866,305)Exchange difference - 567,781 567,781As at 31 December 2007 18,425,350 12,253,294 30,678,644Accumulated amortizationAs at 31 December 2005 5,327,230 703,366 6,030,596Charge for the year 3,995,630 3,432,057 7,427,687Impairment loss (Note 10) (1,478,391) - (1,478,391)As at 31 December 2006 7,844,469 4,135,423 11,979,892Charge for the year 1,286,416 2,674,868 3,961,284Write down - (3,526,747) (3,526,747)Exchange difference - 378,487 378,487As at 31 December 2007 9,130,885 3,662,031 12,792,916Net book valueAs at 31 December 2005 18,810,926 7,992,650 26,803,576Net book valueAs at 31 December 2006 10,211,730 13,668,828 23,880,558Net book valueAs at 31 December 2007 9,294,465 8,591,263 17,885,728 Intangible asset write down The Group recorded a write down of $8.3 million (net of accumulatedamortisation) related to website development assets. The Group identified thecessation of transaction processing in the North American market and theresultant significant restructuring of the Group's cost base as indication ofasset impairment. The carrying amount was written down to the estimatedrecoverable amount based on future cash flows expected from non-North Americanmarkets. 10. GOODWILL The Group had the following balances: QUICK ACCESS INTERNATIONAL NETBANX TOTAL LIMITED LIMITED $ $ $CostAt 1 January 2006 5,819,266 10,201,397 16,020,663Reduction arising from liabilities not (137,165) - (137,165)previously recognisedExchange differences 83,911 1,444,791 1,528,702Balance at 1 January 2007 5,766,012 11,646,188 17,412,200Exchange differences - 155,974 155,974Balance at 31 December 2007 5,766,012 11,802,162 17,568,174 Accumulated impairment lossesAt 1 January 2006 - - -Impairment loss recognised in the year 5,766,012 - 5,766,012Balance at 1 January 2007 5,766,012 - 5,766,012Impairment loss recognised in the year - - -Balance at 31 December 2007 5,766,012 - 5,766,012 Carrying amountAs at 31 December 2006 - 11,646,188 11,646,188Carrying amountAs at 31 December 2007 - 11,802,162 11,802,162 The Group performs goodwill and intangible impairment tests at least annually orwhenever events or changes in circumstances indicate that the goodwill andintangible carrying value for a business unit may not be recoverable. In the fourth quarter of 2006, the Group recorded goodwill and intangible assetimpairment of $11.7 million (net of any related accumulated amortisation)representing complete impairment of goodwill and intangible assets acquired onthe purchase of Quick Access International Limited in 2005. In accordancewith IAS 36, an impairment loss should be recognised when the recoverable amountof an asset is less than its carrying amount. The recoverable amount was deemedto be zero, based on an analysis of the unit's future cash flow projections andmanagement's best estimate of the set of economic conditions that will existover the remaining useful life of the assets. The recoverable amount of NetBanx Limited ('the cash-generating unit') is basedon value-in-use calculations. Those calculations use cash flow projectionsbased on actual operating results. A pre-tax discount rate of 5.5% has beenused in discounting the projected cash flows. The recoverable amount of thecash-generating unit exceeds its carrying amount. The Directors believe that anyreasonably possible change in the key assumptions on which the cash-generatingunit's recoverable amount is based would not cause the cash-generating unit'scarrying amount to exceed its recoverable amount. 11. INVESTMENT IN ASSOCIATE Name of Associate Principal Activity Place of incorporation Ownership Interest and operation 2007Centricom Pty Limited Electronic payment processing Australia 27% Investment in Associate Centricom Pty Limited $CostAt 1 January 2007 -Share purchase on 3 August 2007 4,359,162Group and Company's share of loss from acquisition to 31 December 2007 (243,536)At 31 December 2007 4,115,626 Summarised financial information in respect of the Group's associate is set outbelow: AS AT 31 DECEMBER 2007 $ Total assets 2,610,856Total liabilities (658,839)Net assets 1,952,017 Total revenue for the period from 3 August 2007 to 31 December 2007 146,978Total (loss)/profit for the period (1,373,594) 12. INTEREST IN JOINT VENTURE The Group has a 50% equity shareholding with equivalent voting power inCentricom Europe Limited, a joint venture established in the United Kingdom. As at 31 December 2007, the Group has contributed $50,258 of set up costs to thejoint venture which has yet to begin operations. 13. TRADE AND OTHER PAYABLES The Group has the following balances: AS AT 31 AS AT 31 DECEMBER DECEMBER 2007 2006 $ $Accounts payable 11,706,014 9,569,648Accrued accounts payable 10,106,701 7,291,132Payroll liabilities 1,088,522 1,338,599 22,901,237 18,199,379 14. FORFEITURE PAYABLE On 18 July 2007, the Company entered into a Deferred Prosecution Agreement ("DPA") with the United States Attorney's Office for the Southern District of NewYork ("USAO"). Pursuant to the DPA, the Company forfeited $136 million to theUSAO as disgorgement of certain profits received by the Group from theactivities described in the Statement of Admitted Facts attached to the DPA.This amount included the approximately $57.7 million which the USAO previouslyseized. The Company agreed that it would satisfy the remaining portion of itsforfeiture obligation with a payment of $40 million to be paid on or before 15October 2007, and the remaining balance to be paid on or before 17 January 2008. Full terms of the DPA are available on the Group's website atwww.neteller-group.com. During the year, the following details have been recorded: Forfeiture payable $ Forfeiture of profits 136,000,000Credit for funds seized (57,749,585)Payment made on 15 October 2007 (40,000,000)Remaining balance as at 31 December 2007 (38,250,415) The Company has made the final payment of $38.25 million to the US authoritieson 16 January 2008. 15. CONDITIONAL CONSIDERATION PAYABLE Quick Access International Limited (Quick Access) was purchased on 1 January2005 for total consideration of MOP (Macau Pataca) 100 million. Cash ofMOP60.025 million was paid as initial consideration, with a remaining MOP20million and MOP19.975 million to be paid on the first and second anniversary ofacquisition respectively on a conditional basis. The conditions involvemaintaining service contracts between Quick Access and various parties providingelectronic payment and communication equipment services. The finalconsideration was paid in the year as all conditions have been met and theconditional consideration was included in the cost of the purchase. 16. SHARE CAPITAL AS AT 31 AS AT 31 DECEMBER 2007 DECEMBER 2006 £ £Authorised:200,000,000 ordinary shares of £0.0001 per share 20,000 20,000(At 31 December 2006: 200,000,000 ordinary shares of £0.0001 pershare) 1,000,000 deferred shares of £0.01 per share 10,000 10,000(At 31 December 2006: 1,000,000 deferred shares £0.01 per share) Issued and fully paid $ $ 119,920,953 ordinary shares of £0.0001 per share (At 31 December 2006: 119,920,953 ordinary shares of £0.0001 21,725 21,725per share) 1,000,000 deferred shares of £0.01 per share 18,000 18,000(At 31 December 2006: 1,000,000 deferred shares of £0.01 pershare) Total share capital 39,725 39,725 During 2006 the Company made a number of purchases of its own shares totalling800,000 shares representing 0.65% of the then issued share capital at pricesranging from 559 1/2 pence to 600 pence. All of the shares purchased werecancelled. No such purchases were made during 2007. Holders of the ordinary shares are entitled to receive dividends and otherdistributions, to attend and vote at any general meeting, and to participate inall returns of capital on winding up or otherwise. Holders of the deferred shares are not entitled to vote at any annual generalmeeting of the Company and are only entitled to receive the amount paid up onthe shares after the holders of the ordinary shares have received the sum of£1,000,000 for each ordinary share held by them and shall have no other right toparticipate in assets of the Company. 17. TRANSLATION RESERVE YEAR ENDED 31 YEAR ENDED 31 DECEMBER 2007 DECEMBER 2006 $ $Balance at beginning of year 1,349,198 (1,497,326)Arising on translation of foreign operations 8,063,615 2,846,524Balance at end of year 9,412,813 1,349,198 Exchange differences relating to the translation from the functional currenciesof the Group's foreign subsidiaries into United States dollars are brought toaccount by entries made directly to the foreign currency translation reserve. 18. PROFIT FROM OPERATIONS Profit from operations has been arrived at after charging: GROUP COMPANY YEAR ENDED YEAR ENDED YEAR ENDED 2007 YEAR ENDED 2006 2007 2006 $ $ $ $Depreciation of property, plant & 4,621,700 3,918,375 525,620 889,554equipmentAmortisation of intellectual property 3,961,284 7,427,687 1,745,043 5,169,356 8,582,984 11,346,062 2,270,663 6,058,909 Remuneration of the auditors for audit, advisory and other services has beenrecorded as follows: YEAR ENDED 2007 YEAR ENDED 2006 $ $Audit servicesStatutory audit 389,000 530,000Non-audit servicesTax and other advisory services 282,000 105,450 Total 671,000 635,450 19. RESTRUCTURING COSTS The Group incurred certain costs pertaining to the cessation from its NorthAmerican-facing business during the year ended 31 December 2007. These costsincluded severance payments, retention costs for certain key employees, thewrite down and disposal of assets, amending and settling vendor contracts andprofessional and legal fees incurred in the resolution of the US situation(including the distribution of funds to US customers and negotiating potentialsanctions against the Group culminating in the DPA on 18 July 2007). The Group has incurred the following costs: YEAR ENDED 31 YEAR ENDED 31 DECEMBER 2007 DECEMBER 2006 $ $Severance and retention 3,249,032 1,160,177Supplier contract renegotiation 1,868,435 -Settlement of third party litigation 1,775,548 -Asset write downs and disposal net of proceeds 13,329,640 -Professional and legal fees and expenses 16,168,363 -Other restructuring costs 590,499 - 36,981,517 1,160,177 The Group's asset write downs and disposals consist of: YEAR ENDED 31 DECEMBER 2007 $Non cash items Write down of prepaid US patents, trademarks and licences 307,663 Write down of computer equipment and software, net of accumulated depreciation 4,367,645 Disposal of computer equipment and software, net of accumulated depreciation 98,439 Disposal of 41st Avenue property, net of proceeds and accumulated depreciation 99,722 Write down of intangible assets, net of accumulated depreciation 8,339,558Total non cash items 13,213,027 Cash expenses on disposal of 41st Avenue property 116,613 13,329,640 20. TAX The Company is incorporated in the IOM and is subject to a tax rate of zeropercent and accordingly pays no tax in the IOM. Taxation for other jurisdictions is calculated at the rates prevailing in therespective jurisdictions. The charge for the year can be reconciled to the profit per the consolidatedincome statement as follows: YEAR ENDED YEAR ENDED 31 DECEMBER 31 DECEMBER 2007 2006 $ $ Loss before tax (185,759,362) 107,381,438Effect of different tax rates 14,734 4,910,025of subsidiaries operating in otherjurisdictionsEffective tax rate for the year - 4.6% At 31 December 2007, foreign taxes of $2,326,889 (2006: $4,901,296) wereoutstanding. 21. EARNINGS (LOSS) PER SHARE From continuing operations The calculation of the basic and diluted earnings or loss per share is based onthe following data: YEAR ENDED YEAR ENDED 31 DECEMBER 31 DECEMBER 2007 2006 $ $Earnings (loss)Earnings/(loss) for the purposes of basic and diluted (185,774,096) 102,471,413earnings per share being net profit/(loss) attributable toequity share holders of the parent Number of sharesWeighted average number of ordinary shares for the purposeof basic earnings per share 119,920,953 120,174,855Effect of dilutive potential ordinary shares due to employee - 1,142,645share options Weighted average number of ordinary shares for the purposeof diluted earnings per share 119,920,953 121,317,500 Basic earnings (loss) per share $(1.55) $0.85Fully diluted earnings (loss) per share $(1.55) $0.85 22. OPERATING LEASE ARRANGEMENTS At the balance sheet date, the Group had outstanding commitments for futureminimum lease payments, which fall due as follows: YEAR ENDED YEAR ENDED 31 DECEMBER 31 DECEMBER 2007 2006 $ $Within one year 238,582 1,471,796In the second to fifth years inclusive 461,135 3,012,835After five years - 832,761 Operating lease payments represent rentals payable by the Group for certain ofits office properties. Leases are negotiated for an average term of seven yearsand rentals are fixed for an average of three years. The lease paymentsrecognised in expense for the year are $1,126,095 (2006:$ 1,335,636). 23. SHARE BASED PAYMENTS The Company's share option plan was adopted pursuant to a resolution passed on 7April 2004. Under this plan, the Directors may grant share options to eligibleemployees including Directors to subscribe for ordinary shares of the Company. No consideration is payable on the grant of an option. Options may generally beexercised to the extent that they have vested. Options vest according to therelevant schedule over the grant period following the date of grant. Typically,options have been granted for a three and a half year grant period and havevested in equal thirds on or about the anniversary of the grant date. However,the Directors are permitted under the Plan Rules to alter the vesting scheduleand the grant period. The exercise price is determined by the Directors, andshall not be less than the market value at the date of grant. The option planprovides for a grant price to equal the average quoted market price of theCompany shares on the three days prior to the date of grant. Share options areforfeited if the employee leaves the Group before the options vest. Aparticipant of the share option plan has 30 days following the date of grant tosurrender the option and if surrendered, the option will not be deemed granted. On 5 January 2007, the Company granted 3,725,000 share options to Directors andeligible employees to acquire ordinary shares at an exercise price of £1.38 pershare, expiring on 14 April 2010. On 30 October 2007, the Company granted 3,281,050 share options to Directors andeligible employees to acquire ordinary shares at an exercise price of £0.7275per share, expiring on 29 October 2011. On 21 November 2007, the Company granted 194,417 share options to Directors andeligible employees to acquire ordinary shares at an exercise price of £0.72 pershare, expiring on 20 November 2011. The options granted on 30 October and 21 November 2007 were grantedconditionally upon existing option holders agreeing to surrender their optionsgranted in 2005 or on 9 January, 14 April, and 16 May 2006. The surrender ofoptions is reflected as option forfeitures in the table below. On 13 October 2007, a total of 1,122,377 options granted on 14 April 2004 with an exercise price of £2.00 expired. Options recorded under share option expense may not agree to the total optionsgranted in the period. The accounting for options coincides with the dayfollowing the last day for acceptance of the option, which is subsequent totheir date of grant. Equity-settled share option plan YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 2007 2007 2006 2006 WEIGHTED OPTIONS WEIGHTED OPTIONS AVERAGE AVERAGE EXERCISE EXERCISE PRICE PRICE £ £ Outstanding at the 6.00 4.94 beginning of year 6,458,350 5,898,580Granted during the year 1.06 7,200,467 7.95 2,250,000Forfeited during the year 5.85 (5,837,824) 5.48 (1,237,430)Exercised during the year - - 2.67 (452,800)Expired during the year 2.00 (1,122,377) - -Outstanding at the end of 1.50 6.00year 6,699,116 6,458,350Exercisable at the end of 3.06 4.62the year 1,640,885 1,791,978 The weighted average share price at the date of exercise for share optionsexercised during the year was £nil as no options were exercised in the year.The options outstanding at the end of the period had a weighted averageremaining contractual life of 2.79 years (31 December 2006: 1.94 years). The options granted in 2007 are priced using a trinomial lattice model to betterreflect factors including employee exercise behaviour, option life and optionforfeitures. The inputs into the model are as follows: YEAR ENDED 31 YEAR ENDED 31 DECEMBER 2007 DECEMBER 2006Weighted average exercise £1.14 £7.95priceExpected volatility 77% 56%Expected life 3 years 3 yearsRisk free interest rate 4.91% 4.5%Expected dividends - -Employee exit rate 7% 9% Expected volatility was determined by calculating the historical volatility ofthe Company's share price from the time of issue to the date of grant. Theexpected life used in the model has been adjusted, based on management's bestestimate, for the effects of non-transferability, exercise restrictions, andbehavioural considerations. The Group recognised total expenses of $13,523,346 (2006: $6,106,827) related tothe equity-settled share-based payments transactions in 2007. Share optionssurrendered in the year resulted in the recognition of the options' remainingexpense from the time of surrender to their stated expiration date. Acceleratedoption expense was $4,972,739 in the year ended 31 December 2007 which isincluded in the total share option expense. As at 31 December 2007, a number ofoptions had expired and, as a result, the related equity reserve was transferredto retained earnings. 24. FINANCIAL INSTRUMENTS Financial instruments consist of cash and cash equivalents, restricted cash,Qualifying Liquid Assets held for European consumers, receivable from customers,trade and other receivables, payable to consumers and merchants, payable toEuropean consumers and trade and other payables. i) Fair values The fair values of cash and cash equivalents, restricted cash, Qualifying LiquidAssets held for European consumers, receivable from customers, trade and otherreceivables, payable to consumers and merchants, payable to European consumersand trade and other payables approximate the carrying values due to theshort-term nature of these instruments. ii) Credit risk and concentrations The Group is exposed to credit risk to the extent that its customers mayexperience financial difficulty and would be unable to meet their obligations.The Group manages the exposure to credit risk by employing various onlineidentification verification techniques, enacted transaction limits and havingsignificant number of customers. As these customers are widespreadgeographically and the merchants are active in various industries, the exposureto credit risk and concentration is mitigated. iii) Interest rate risk The Group is not exposed to significant interest rate risk. iv) Currency risk The Group is not significantly exposed to foreign currency exchange risk, as themajority of the transactions are denominated in US dollars. The Group managesthe exposure to currency risk by commercially transacting in US dollars and bylimiting the use of other currencies for operating expenses, thereby minimisingthe realised and unrealised foreign exchange gain (loss). 25. SUBSIDIARIES Details of the Company's principal subsidiaries as at 31 December 2007 are asfollows: NAME OF SUBSIDIARY PLACE OF INCORPORATION PROPORTION OF PROPORTION OF PRINCIPAL ACTIVITY AND OPERATION OWNERSHIP VOTING POWER HELD INTERESTNETELLER (UK) Limited United Kingdom 100% 100% Authorised e-money issuerNT Services Limited Canada 100% 100% Processing payments on behalf of the CompanyNetBanx Limited United Kingdom 100% 100% Full service payment processingQuick Access International Macau 100% 100% Debit card paymentLimited processing1155259 Alberta Limited Canada 100% 100% FinancingNT Services Building Canada 100% 100% Property holding companyCorporationCardload Incorporated Canada 100% 100% DormantNETELLER Express Limited Isle of Man 100% 100% DormantLime Enterprises Limited Isle of Man 100% 100% Holding companyJade Enterprises Limited Isle of Man 100% 100% Holding companyNet Group Holdings Limited Isle of Man 100% 100% Holding companyNetAdmin Limited Isle of Man 100% 100% Employment & AdministrationNETELLER Operations Isle of Man 100% 100% e-money issuerLimitedNet ID Limited Isle of Man 100% 100% Identification verificationNetB Limited Isle of Man 100% 100% Holding companyCardload Europe Limited Isle of Man 100% 100% Processing companyGreenscroft Limited Isle of Man 100% 100% Holding companyNX Systems UK Limited United Kingdom 100% 100% DormantNetinvest Limited United Kingdom 100% 100% Holding companyNetpro Limited United Kingdom 100% 100% Holding companyNetbanx BV Limited Netherlands 100% 100% Holding companyCharter Access Limited Hong Kong 100% 100% Property leasing companyPeakluck International British Virgin Islands 100% 100% Holding companyLimited365 Access Pte Limited Singapore 100% 100% Holding company 26. RELATED PARTIES During the year, the Group and Company entered into the following transactionswith related parties who are not members of the Group or Company: Purchase of goods Amounts owed to Purchase of goods Amounts owed to and services related parties and services related parties in 2007 2007 in 2006 2006 £ £ £ £ Amber Business Limited 9,537 3,975 - - Amber Business Limited was a related party of the Group and Company as JohnWebster, a Director and majority shareholder of Amber Business Limited, was a Director of the Company throughout the period. Alltransactions were at fair market value. During the year, Dale Johnson (Non-Executive Chairman) provided consultingservices to the Group amounting to £60,003 (2006: nil). 27. SUBSEQUENT EVENT The Group confirms that its subsidiary, NT Services Building Corp., hascompleted the sale of its principal property at 27th Avenue in Calgary, Canada,for a total consideration of CAD$ 33.5 million (approximately US$ 33.5 million).In accordance with the terms of the sale agreement, the sale proceeds will bepaid to the Group on 31 March 2008 net of a non-refundable deposit of CAD$300,000 which was received on 11 February 2008. The Group will continue to leaseoffice space in the building on usual commercial terms. The sale price is veryclose to the net book value of the property and as a result there are likely tobe no significant gains or losses on disposal. Any marginal gains or losses thatmay arise will be reflected in the Group's 2008 results. 28. CONTINGENT LIABILITIES From time to time the Group is subject to legal claims and actions. The Grouptakes legal advice as to the likelihood of success of the claims and actions andno provision or disclosure is made where the Directors feel, based on thatadvice, the action is unlikely to result in a material loss or a sufficientlyreliable estimate of the potential obligation cannot be made. As part of theongoing market risk assessment process adopted by the Company and the Group,there is continued monitoring of legal and regulatory developments and theirpotential impact on the business. Appropriate advice continues to be taken inrespect of these developments. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Paysafe Group